- The Canadian economy continued to move forward in April, growing by 0.2% month-on-month on the back of expansion in service-producing industries.
- The breadth of growth remained fairly strong, as 14 of the 20 major industries (representing roughly 76% of output) saw growth.
- A mixed performance was turned in on the goods-producing side of the economy. Mining, quarrying and oil &gas saw a 1.2% expansion, helped by strong growth in drilling and rigging services that more than offset weakness in the oil and gas extraction subsector, stemming from issues at the Mildred Lake oil facility. Growth was flat to slightly up elsewhere, except among manufacturers, where output fell 0.9% in April nearly reversing the 1.0% climb in March. The decline within subsectors was fairly widespread, as both durable and non-durable manufacturing output contracted in April.
- For the service-producing side of the economy it was another solid month, as output rose 0.3%. Tearing out of the gate was arts, entertainment, and recreation, helped by the presence of five Canadian teams in this year’s NHL playoffs. Other notable gainers were for accommodation and food services (+1.1%), transportation (+1.0%), retail trade, wholesale trade, and professional services (all +0.5% m/m in April).
Key Implications
- The Canadian economy kicked the second quarter off on a decent footing, posting its sixth straight monthly expansion. With Canada Day tomorrow, it is perhaps worth noting that at least part of the gain can be attributed to five Canadian teams making the NHL playoffs this year, a welcome departure from the 2016 performance. Beyond the impact of hockey however, was a still solid economy that continues to see growth across a wide swath of industries, and which looks set to meet our expectations of 2.9% growth (q/q SAAR) for Q2.
- With another quarter of solid economic growth looking likely, Canada has clearly put the worst of the 2014/15 oil price shock behind it. Consequently, all eyes are now on the Bank of Canada’s monetary policy, with the overnight target currently at an emergency level of 0.50%. Recent communications have struck a markedly hawkish tone, suggesting that it is no longer a matter of *if* monetary stimulus will be removed this year, but rather *when*.
- As it stands, we remain of the view that the first Bank of Canada interest rate increase in more than seven years will take place this fall, likely in October. While markets have placed good odds on an increase at the Bank’s July 12th meeting, we believe that the value of waiting until October in terms of additional clarity around oil prices, housing markets, and inflationary pressures outweighs the marginal impact that hiking three months earlier would have on inflation one to two years from now.
- That said, this is not a cut and dry case, and a July hike can easily be justified given the forward-looking nature of monetary policy. Certain to inform the Bank of Canada’s thinking (and ours) will be the forward-looking components of the latest Business Outlook Survey, due for release today at 10:30AM ET.
